Terms in this set (7)
a curve that shows consumption bundles that give the consumer the same level of satisfaction (i.e. combinations of pizza and Pepsi with which the consumer is equally satisfied.)
Indifference Curve Properties
1. Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather than less. 2. Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other. 3. Indifference curves do not cross. 4. Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other.
Marginal Rate of Substitution
The rate at which the consumer is willing to trade off one good for the other (i.e. how much Pepsi the consumer requires to be compensated for a one-unit reduction in pizza consumption).
The consumption bundles that the consumer can afford
Additional bundles could be consumed with an increase in income.
How might a budget constraint be impacted by income increase?
Indifference curve and budget constraint
What two graphical elements are needed in order to determine a consumer's optimal point of consumption?
Consumers optimal point of consumption
The point at which this indifference curve and the budget constraint touch (the best combination of pizza and Pepsi available to the consumer.) The marginal rate of substitution equals the relative price of the two goods.